G10 currencies trading in narrow ranges. All eyes on the geopoitical tensions in Ukraine

Last week’s events (very light in any case) were overshadowed by the dramatic geopolitical developments over the weekend in Ukraine. The absence of critical macroeconomic news or policy decisions meant that G10 currencies moved in relatively narrow ranges. Sterling was the standout, recovering the previous week’s losses and rising over 1% against the dollar and about half that against the euro. Risk assets rose moderately. Of course, the events in Crimea will cast a major pall over risk assets this week. Going on past performances, we would expect the dollar to rise across the board, equities to go down, and energy commodities to rise. To the volatility of the polititcal situation in Crimea we will add the ECB and Bank of England meetings next week, and the all-important US payroll report on Friday. Expect plenty of volatility.

GBP

A light data week centered mostly in the details and revision of Q4 GDP growth. While the headline figure was unrevised at slightly under 3% in annualized terms, there was a significant shift in the components, showing less strength in consumption and more in investment, with net trade roughly flat. This is actually moderately good news, as the picture that emerges about the UK recovery is more broad based and less dependent on consumers than had been thought. Sterling responded well to these numbers, largely recovering its losses from the previous week and rising over 1% against the greenback. The question on sterling is now how it will react to geopolitical tensions, since we have not had a crisis of this magnitude since at least 2008 with the Russian-Georgian war, and back then the financial crisis was the main factor driving the markets. Next week promises to be interesting.

EUR

There was a puzzling upside surprise in eurozone inflation last week. The headline number was unchanged in February at 0.8% YoY, but core inflation rose two tenths of a percent to 1% YoY. However, the available country-level data showed declines in Germany, Italy and Spain. We think it is necessary to await the March data to get a clearer picture, but the upward surprise in core inflation clearly rules out any action on the part of the ECB next Thursday. The euro reacted with relief rising nearly 0.5% within minutes of the inflation release. Other data was less reassuring, with unemployment still stuck at 12%, and Spanish Q4 GDP growth revised down, but investors are squarely focused on central bank policy as a driver of currency movements and the euro closed just above 1.38 – before the full scale of the events in Ukraine become clear, that is. As this goes to press, most of the common currency weekly gains have been given up in Sunday night trading.

USD

The downward revision of Q4 GDP growth, from 3.2% to 2.4%, was largely expected and had limited market impact. The revision affected mostly consumer spending, revised down by 0.7%. We expect a similar outcome in the current quarter, as activity remains depressed to an unclear extent by the unusually harsh winter experienced in the Midwest and East Coast of the country. The next payroll report on Friday should still be impacted by the winter storms, and therefore we do not expect that it will change significantly the Federal Reserve outlook for tapering monetary stimulus. We suspect the events in Ukraine will be the decisive factor next week in the greenbacks performance